Fitch: Kazakh economy gradually adjusting to oil price shock

The international rating agency Fitch Ratings has affirmed Kazakhstan's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'BBB' with Stable Outlooks.

The issue ratings on Kazakhstan's senior unsecured foreign-currency bonds have also been affirmed at 'BBB', Fitch said Apr. 24. The Short-Term Foreign- and Local-Currency IDRs have been affirmed at 'F2'. The Country Ceiling has been affirmed at 'BBB+'.

“Kazakhstan's IDRs balance strong public and external balance sheets, underpinned by large government savings and a substantial sovereign net foreign asset position, against high commodity dependence, a weak banking sector, weak governance indicators and a volatile macroeconomic performance compared with 'BBB' peers,” the Fitch message said.

The rating agency said the Kazakh economy's gradual adjustment to the large oil price shock of recent years is continuing, facilitated by exchange rate flexibility, monetary policy reforms, restructuring of the banking sector and fiscal stimulus.

Real GDP growth was 1.0 percent last year after 1.2 percent in 2015, supported by the government's countercyclical stimulus programme. Fitch expects real GDP growth to pick up to 2.2 percent in 2017 as oil output increases (the Kashagan oil field has restarted operations), foreign direct investment (FDI) remains strong and the stimulus programme continues. However, even if rising oil output and energy-related FDI imply more favourable medium-term economic prospects, continued commodity dependence means macroeconomic volatility is likely to be higher than 'BBB' peers over the forecast horizon, according to Fitch.

Debt tolerance is compromised by weaker governance indicators, as measured by the World Bank. Constitutional amendments approved in March 2017 meant to hand over some of the president's wide-ranging powers to the government and parliament are unlikely to trigger a short-term improvement in governance indicators, in Fitch's view.

Fitch said the main factors that, individually or collectively, could trigger negative rating action are a further weakening in the sovereign external balance sheet, materialisation of significant contingent liabilities above those already identified from the banking sector on the sovereign balance sheet and policies that hamper fiscal consolidation or undermine monetary policy credibility.

The main factors that, individually or collectively, could trigger positive rating action are a sustained recovery in external and fiscal buffers, steps to reduce the vulnerability of the public finances to future oil price shocks, for example by reducing the non-oil deficit, a sustained recovery in the economy supported by substantial improvements in the business environment and governance and greater diversification, as well as substantial improvement in the performance of the banking sector, according to Fitch.

Fitch assumes that Brent crude will average $52.5/b in 2017 and $55/b in 2018.


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